Moody’s Takes Dim View of Kentucky Due to Pension Reform Mess

Ratings agency doesn’t downgrade the state but puts it on ‘credit negative’ status, which could portend trouble ahead.

Kentucky’s botched attempts at pension reform is going to cost the troubled state dearly, as one of America’s top credit rating agencies has deemed it “credit negative” for its inaction.

This is not the same as a downgrade, but puts the state on notice that the agency looks at its situation with concern. Moody’s submitted its warning to the Bluegrass State because of a state Supreme Court ruling that struck down Governor Matt Bevin’s controversial pension law. The firm said the motion “delayed reforms to the state’s severely underfunded pension plans that were set to provide modest savings over the long term.”

The move does not change Kentucky’s credit rating, but addresses Moody’s uncertainty about the state’s ability to pay its $43 billion liability. Of that total, the rater said Kentucky is about $39 billion short, as the debt is 332% of the state’s revenue. At present, Moody’s gives the state government an Aa3 rating, which is high-quality.

Bevin’s law would have put new teachers into a 401(k)-style retirement system, doing away with a traditional defined benefits plan. It also would have limited the number of sick days that can be accrued toward their retirements.

The law was tucked into a sewage bill at the end of the 2018 legislative session, then passed the following morning. Attorney General Andy Beshear sued Bevin on grounds that the pension law and how it was passed violated the state constitution.

Then the Kentucky Circuit Court struck down Bevin’s pension law, which the governor appealed, taking the matter all the way up the state’s judicial ladder. Last week, the Supreme Court’s decision seemingly ended the issue, but the high court’s dismissal only fueled Bevin’s fire as he called a special reform-focused legislative session almost immediately.

But that went nowhere. The special session was adjourned with no resolution barely a day later. The governor’s top reason for calling the special session was fear of a credit downgrade, which would be another sour note for the badly funded state.

Pension reform will still be a top priority when the 2019 session begins, and assuming that lawmakers can agree on some form of benefit changes, Moody’s said Kentucky would “stand to reduce its pension contribution requirements, or at the very least enable its current contribution levels to go further toward reducing its unfunded liabilities.”

However, the credit rating agency is also expecting Beshear, a Democrat seeking to de-throne the Republican Bevin next year, to “challenge the laws on substantive grounds.”